I'm new here. The question I have is about retirement investing. My wife and I are going to be retiring in the next year (me) or two (her). By way of background we are both covered by pension plans and we both have 401k's that thankfully have done well. Recently, we sold an investment property and we have an additional $250k (after taxes) from that sale that we would like to invest. We believe that our other retirement accounts should cover our expenses in retirement, but since we are not retired yet we will not know that for certain until the time comes.

That is where the proceeds from our recent sale come into play. We would like to invest that money in a very safe manner that will protect the principal and provide income that we will be able to use as a supplement to our retirement accounts, or in the best case scenario, use that money to travel, etc. I have spoken to two investment professionals and they have provided different options.

The first is promoting an annuity that will pay a yearly amount that increases each year. The first year the annuity would pay about $10,000. It would increase $1000+ dollars with each passing year. The annuity will be paid as long as we are alive. It provides the same amount to the survivor. Once we are both deceased, the original amount invested will be given in a lump sum to the beneficiary of our choice.

The second person we spoke to suggests a diversified portfolio of bonds (about 83%) and stocks (about 17% bonds). This portfolio would contain small amounts invested in emerging markets funds, metals, small caps and growth funds, and an international fund. Those funds would incorporate 17% of the portfolio. The other 83% would be invested in bonds.

My initial impressions are that I do not like the annuity suggestion because I hate the thought of relinquishing control of the principal for the rest of our lives. I say this in spite of the fact that the monthly annuity payments would be more than the expected rate of return for the stock/bond portfolio, which over two decades has been just over 6%.

I would appreciate some thoughts and feedback. Again, my main goal is to preserve the capital while creating supplemental retirement income. What do you think about the above suggestions, and do you have any of your own?

Thnaks

Wed Dec 23, 2015 8:22 pm

oldguySenior Member

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The answer depends on the 'heirs' situation & on the size of the two 401k funds.
Eg, if you have no children/grandchildren, your goal is to have enough money for your lives. Or, if you have heirs, your goal is to leave a sizable inheritance.

When we retired we set aside our "safe' money (bonds) to last beyond our lives. And we invested the "overage' into growth funds, funds that will have a longer time horizon for grandkids.

Will you both have SS annuities to add to your pensions?

In either case, I would avoid the annuity - when you buy an annuity the money is GONE, you spent it. The salespersons have dozens of ways to make annuities sound too good to be true - "your money can only grow, it can never go". "And then you get it back". lol - kinda like whole-life-insurance. That $10k is only 4% of your $250k - you can get that anywhere and still own your $250k. And your first "investment professional" is most likely a salesperson, trying to score a commission.

We use the SP500 Index for our 'growth' money, and bond funds for our 'safe' money. And I avoid high yield (junk) bonds, I keep all of the safe money 'safe'. If I want to increase our risk level, I do it at the top level - eg, if we are 50/50 stocks/bonds, I increase risk by moving to 60/40.

BTW, when we retired, we were surprised at how little it cost - no more $20,000/yr to the 401ks, no more $16,000/yr to SS/med, no more life insurance premiums, etc. Your actual out-of-pocket costs drop dramatically. We spend more on travel now - both miles on the cars and air fare. But that's in the $10k/yr range, not a budget buster.

Enjoy it, it's great!

Wed Dec 23, 2015 8:59 pm

Nick60New Poster

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We do have children, and we will have SS. The goal is to keep the principal but not necessarily to pass it on. We have other real estate holdings that will go to our kids. We want the principal so we can have options. I agree with you that the annuity is a non starter, but I mentioned it because it is (was) on the table. What do you think about the investment portfolio made up of stocks and bonds. I am not crazy about emerging markets and metals right now, although it may be a buying opportunity. Also, with interest rates poised to go up what do you think about bonds?

Wed Dec 23, 2015 9:12 pm

oldguySenior Member

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I've done best with the SP500 Index Fund, it is an unmanaged fund that contains about 80% of the US business capital, plus plenty of foreign capital due to US companies with overseas divisions. I like the diversification across the whole market rather than small cap, emerging, big blue value, big blue growth. The market cannot be timed - and it is even harder to try to time the pieces (with sector ETFs etc). Only about 15% of fund managers are able to beat the SP500 Index - and it's not even the same 15% every year.
The SP500 Index has returned an average of 11%/yr almost forever - I don't try to beat it. The 11%/yr means that your money doubles every 6 or 7 years, I stick with that.
Our bond funds are Vanguard & Fidelity, I'm using 3-year duration bonds so that the up/down rates have only a small effect on my principal.

Wed Dec 23, 2015 10:35 pm

Steve ChinFirst Time Poster

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Hi! Well, first, this does not sound correct to me about the annuity-proposed to you.

“Once we are both deceased, the original amount invested will be given in a lump sum to the beneficiary of our choice.” I believe the beneficiary gets ONLY what you have not “used.” If you have received $100,000 and both die, then the beneficiary gets the “remaining” $150,000. It's best to read and reread everything before you sign. I am not a big fan of bonds. Interest rates are low now and you would be locking in a fixed rate. You may find the chart and other information on this page helpful: http://www.retirementincome.net/retirement-planning/using-stocks-for-retirement-income/ It shows the income pattern of blue chip stocks vs bank interest rates: I think that a 50/50 mix of stocks and bonds works really well (you may look up the Trinity Study).